Request advice regarding my CD situation

[Earl E Retyre]

I want your opinion to help me make a big decision regarding CDs. I currently own 3 CDs at Andrews Federal Credit Union earning 3.01% each valued at about $160,000 (so a total of $480k). They mature in November (8 months from now). If I withdraw, the early withdrawal penalty is 1 year interest (total of $14,400 penalties for all 3 CDs).

Initially, I was thinking of just letting it ride, hoping that interest rates stay the same or continue to rise, and in November move to a 5 year CD at 5% or higher. But now I am concerned that interest rates could decline by November. I created some spreadsheets and it looks like 4.7% is about the break even point. That is, if interest rates decline below 4.7% by November then I would be better off breaking the CDs and taking the early withdrawal penalty. If interest rates stay at 5% for a 5 year CD or move higher then I would be better off not taking the penalty.

My current thought is that for a bird in the hand, assuming I can get 5% on a 5 year CD next week locked in for the next 5 years, that I would take the penalty. Another thought I had was to break 1 or 2 of the CDs and leave the other(s) in the 3.01%.

Opinions?

A couple other notes:
- I called Andrews and there is no option to not take a penalty and leave the money there.
- I want to keep this money in CDs (I already have enough in stock and real estate) – not looking to change asset allocation.

 

[Spock]

This might help: https://www.depositaccounts.com/TOOLS/BREAK-CD-CALCULATOR.ASPX
The calculator is very binary... in that if you save $1 by not selling it will tell you not to sell. But it doesn't factor in re-investmet risk of lower rates. If it's reasonably close I've been selling the CDs and trying to shift to non-callables.

 

[Earl E Retyre]

This might help: https://www.depositaccounts.com/TOOLS/BREAK-CD-CALCULATOR.ASPX
The calculator is very binary... in that if you save $1 by not selling it will tell you not to sell. But it doesn't factor in re-investmet risk of lower rates. If it's reasonably close I've been selling the CDs and trying to shift to non-callables.

Thanks, but the calculator does not help my particular situation since it is only comparing the 8 months remaining in the CD. I could enter 7% and it would still tell me not to break. Like you said, it does not factor in re-investment risk of lower rates - which is really the crux of my situation.

I just found an online calculator which takes into account future CD rates. See https://thefinancebuff.com/cd-early-withdrawal-calculator.html. The breakeven is somewhere between 4.5% and 4.7%.

My simple question is really what everyone thinks rates will be in November for 5 year CDs. Obviously no one knows. But if you were me, and if the choices were to:
(a) let it ride at 3.1% and see what rates are in Nov (and hope they are 4.7% or better)
(b) break all 3 and lock in at 5% now (bird in the hand)
(c) hedge your bets and break 1 CD
(d) hedge your bets and break 2 CDs

What would you choose? Maybe I should have done a poll.

I am leaning towards option c or d. But thought someone may persuade me to do (a) or (d).

 

[Spock]

Along with "what would you do" you also have to ask "are you a pessimist or an optimist"-type stuff to gauge the bias of the responses.
I think rate hikes are done. The Fed has a choice of fight inflation or continue to put stress on the banks. Bank stress went from not being on anybodies radar to boiling over in less than a week. The Fed wants inflation as it's the only way the debt can be reduced.. It wants it as high as possible without triggering torches and pitchforks.



If it were my choice option a) let it ride would be off the table.
To gauge my response, I've been attempting to sell some callable brokered CDs to try to shift to longer dates even at slightly lower rates than the current CDs, so naturally I'm not going to suggest to let it ride.

 

[Al18]

Since you’re asking for opinions, I’ll share what I do. I’ve created 4 separate 5 year CD ladders. Every 3 months I have a CD maturing. I can spend it, reinvest in another 5 year CD, or buy a stock or ETF. This gives me a good average return on my CD and allows me to enjoy my retirement without worrying about every nickel and dime.

 

[Earl E Retyre]

Along with "what would you do" you also have to ask "are you a pessimist or an optimist"-type stuff to gauge the bias of the responses.
I think rate hikes are done. The Fed has a choice of fight inflation or continue to put stress on the banks. Bank stress went from not being on anybodies radar to boiling over in less than a week. The Fed wants inflation as it's the only way the debt can be reduced.. It wants it as high as possible without triggering torches and pitchforks.



If it were my choice option a) let it ride would be off the table.
To gauge my response, I've been attempting to sell some callable brokered CDs to try to shift to longer dates even at slightly lower rates than the current CDs, so naturally I'm not going to suggest to let it ride.

I totally agree with your viewpoint. I am thinking (a) is off the table. I wanted to do a sanity check with others.

 

[pb4uski]

Well, using the tool that Spock posted with 8 months to maturity and 12 month EWP and a 3.01% rate you would need to get 7.9% to break even... but that doesn't consider reinvestment risk and whether the 5%+ CDs currently available will be available in Nov 2023.

Here's the way that I would look at it. Let's say that I have $100k in that 3.01% CD with 8 months left. If I withdraw today I get $96,990. If I invest the $96,990 in a 5 year CD at 5% at the end of 5 years I'll have $123,787.

Alternatively, I can let the $100k continue at 3.01% for another 8 months, and at maturity collect $101,997. If I reinvest the $101,997, in a 4 year, 4 month CD I would need to get a yield of ~4.57% to have $123.787 at the end of that term.

Will 4.57%, 52-month CDs be available in November 2023?... sorry, my crystal ball is broken.

 

[dmpi]

I think the banking issue will take months to play out and I'm not sure we've seen the worse of it yet. I think the Fed will continue raising rates but eventually hold for a extended period of time. As a gambling man I would keep the CDs until maturity. Who knows, you might even have better opportunities then vs. now.

 

[pb4uski]

Since you’re asking for opinions, I’ll share what I do. I’ve created 4 separate 5 year CD ladders. Every 3 months I have a CD maturing. I can spend it, reinvest in another 5 year CD, or buy a stock or ETF. This gives me a good average return on my CD and allows me to enjoy my retirement without worrying about every nickel and dime.

So that is a 20 quarter CD ladder, right?

 

[audreyh1]

This might help: https://www.depositaccounts.com/TOOLS/BREAK-CD-CALCULATOR.ASPX
The calculator is very binary... in that if you save $1 by not selling it will tell you not to sell. But it doesn't factor in re-investmet risk of lower rates. If it's reasonably close I've been selling the CDs and trying to shift to non-callables.

It does give you exactly what the loss or gain would be.

 

[Sunset]

What I can see from the question is: Next time OP buys CD's buy them in smaller chunks and vary the length of time.

The way I calculate it, is OP has 8 more months at 3%, changing to a 5% CD means the first 7.4 months of 5% earnings simply replaces the loss from the penalty.

So money wise it's a wash at the 8 month period, except that OP will have locked in at 5%. Whether that is brilliant or silly will only be seen at that time.

 

[Al18]

So that is a 20 quarter CD ladder, right?

Yes, that’s correct. If it was me, I would break 1 CD and create a 5 year CD ladder.

 

[marinauser]

So if you buy the 5 CDs now at 5%, your actual yield to maturity will only be about 4.4% over their life after you pay the penalty. The question is whether you believe rates at the end of the year will be over 4.4% and, if so, how much greater?

 

[Earl E Retyre]

...

Will 4.57%, 52-month CDs be available in November 2023?... sorry, my crystal ball is broken.

Thanks, so the magic number is 4.57% (I thought it was somewhere between 4.5-4.7%). Thanks for this level of accuracy.

I think the banking issue will take months to play out and I'm not sure we've seen the worse of it yet. I think the Fed will continue raising rates but eventually hold for a extended period of time. As a gambling man I would keep the CDs until maturity. Who knows, you might even have better opportunities then vs. now.

Thanks - so, one vote so far for option (a) let it ride

... If it were my choice option a) let it ride would be off the table.

Thanks - so, one vote so far for not doing option (a).

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I appreciate everyone's input so far.

BTW, albeit minor, I was just thinking that if I do the early withdrawal penalty, I will get some of that penalty back from the IRS in taxes (12%), and I will get more back from ACA (not sure the amount). But, that will make the decision to withdraw slightly better.

I recall that with the GTE CD, folks said one could withdraw their dividends first and then withdraw their principal and pay no penalty. Which I regretfully was unaware and paid a penalty. I assume Andrews is not the same way. Or else this would be an easy decision.

 

[Chuckanut]

Your three CDs at one credit union may be over the insurance limit depending upon how their ownership is setup.

I like diversity in my investments. So I would break one and build a ladder of three to five years and maybe catch some good rates later. Or maybe not. My Time Machine is still broke.

Whatever you do don’t go over the insurance limit at one CU. Build the ladder some place else.

 

[audreyh1]

What I can see from the question is: Next time OP buys CD's buy them in smaller chunks and vary the length of time.

The way I calculate it, is OP has 8 more months at 3%, changing to a 5% CD means the first 7.4 months of 5% earnings simply replaces the loss from the penalty.

So money wise it's a wash at the 8 month period, except that OP will have locked in at 5%. Whether that is brilliant or silly will only be seen at that time.

Actually, Andrews FCU does allow partial CD early withdrawals with the penalty prorated to the amount withdrawn of course. So you don’t have to worry about smaller chunks there.

 

[Earl E Retyre]

Your three CDs at one credit union may be over the insurance limit depending upon how their ownership is setup.

I believe the CDs are in both DW and my name. So, I am assuming we get $500k of insurance. Please let me know if that is incorrect.

Actually, Andrews FCU does allow partial CD early withdrawals with the penalty prorated to the amount withdrawn of course. So you don’t have to worry about smaller chunks there.

Oh, I did not know that. Well, then at this point I think I will withdraw 1 of the CDs and half of one of the other CDs. That will hedge my bets by withdrawing 50%. I think I will wait a few more days in order to see what happens this week after the fed meets.

-----
I assume to early withdraw I can get access to the funds almost immediately by doing a wire. Does anyone know if you can wire directly to Fidelity or Vanguard - does the money go into your settlement account if you do?

 

[RetiredAndLovingIt]

Check your CD disclosures for any possible loopholes.
Most credit unions but not all will allow you to withdraw all accumulated interested at any time without penalty. Navy, Achieva and GTE all allow it, Alaska Credit Union does not but Alaska did allow me to direct future interest payments to my savings account where they can be withdrawn monthly.
I have Fidelty pull the interest out and I have been buying CD's at a higher rate. Not a perfect solution but for me it was better than nothing. I was able to close the GTE account penalty free due to a loophole and Alaska and Achieva will mature later this year so hopefully the high rates are still around at that time.
If you only have a few months left on the CD's I would not close them, I'd just wait it out. That's quite a chunk of change to lose especially if you were unable to reinvest at the higher rate you need to make up for the loss.
When I looked at Fidelity today there were only 53 new CD's available and the rates had dropped quite a bit from the 5.3% that I picked up yesterday.

 

[audreyh1]

I believe you can withdraw the dividends credited so far without penalty. You have to dig through this: https://www.andrewsfcu.org/AndrewsFCU/media/Documents/Truth-in-Savings-TIS-April-2021.pdf

 

[pletal]

I want your opinion to help me make a big decision regarding CDs. I currently own 3 CDs at Andrews Federal Credit Union earning 3.01% each valued at about $160,000 (so a total of $480k). They mature in November (8 months from now). If I withdraw, the early withdrawal penalty is 1 year interest (total of $14,400 penalties for all 3 CDs).

Initially, I was thinking of just letting it ride, hoping that interest rates stay the same or continue to rise, and in November move to a 5 year CD at 5% or higher. But now I am concerned that interest rates could decline by November. I created some spreadsheets and it looks like 4.7% is about the break even point. That is, if interest rates decline below 4.7% by November then I would be better off breaking the CDs and taking the early withdrawal penalty. If interest rates stay at 5% for a 5 year CD or move higher then I would be better off not taking the penalty.

My current thought is that for a bird in the hand, assuming I can get 5% on a 5 year CD next week locked in for the next 5 years, that I would take the penalty. Another thought I had was to break 1 or 2 of the CDs and leave the other(s) in the 3.01%.

Opinions?

A couple other notes:
- I called Andrews and there is no option to not take a penalty and leave the money there.
- I want to keep this money in CDs (I already have enough in stock and real estate) – not looking to change asset allocation.

I would go for it, pay the fee. It goes against your interest income. Locking in for close to 5 % for 5 years is rather close to a win. Hate to see rates drop in the next few months. I broke one last week and have some at Andrews also. Trying to get my CD collection down to a manageable level in the next couple of years. Had over 70 of them two years ago.

 

[jazz4cash]

I just ran through this exercise for my AFCU CDs which mature in August and Jan. I had pretty much decided it was worthwhile to terminate and reinvest at current rates. I dug out my CD disclosure and it read SIX MONTHS penalty, not 1 year. I had no problem using the depositaccounts.com EWP calculator. To my surprise it led me to let them run. I guess I need to go back and double check the EWP terms.

 

[Winemaker]

Who said you have to do all three CDs. I'd lop one and let the others ride.

 

[Surewhitey]

I would personally wait. If the recent drop is a blip, we'll be back to 5% next month and more by November... We've been scooping up most 5 yr, 5-5.25% with all our dry powder in the past couple of months.

 

[jazz4cash]

If I withdraw, the early withdrawal penalty is 1 year interest (total of $14,400 penalties for all 3 CDs).

.

I just re-checked my CD disclosure documents. I bought two AFCU 84 month "Nest Egg" IRA certificates in Aug '16 and January '17. The early withdrawal penalty ("for certificates of 24 months or more") is 180 days interest. It does not seem to distinguish between IRA and taxable certificates. The wording on partial withdrawals is vague but it does imply you can take a partial withdrawal.
Even at 6 months penalty it was not worth it to me. YMMV.

When rates started rising, I withdrew the dividends to reinvest at better rates. That has made it easier to be "stuck' earning "only" 3.01%

 

[Earl E Retyre]

I just re-checked my CD disclosure documents. I bought two AFCU 84 month "Nest Egg" IRA certificates in Aug '16 and January '17. The early withdrawal penalty ("for certificates of 24 months or more") is 180 days interest. It does not seem to distinguish between IRA and taxable certificates. The wording on partial withdrawals is vague but it does imply you can take a partial withdrawal.
Even at 6 months penalty it was not worth it to me. YMMV.

When rates started rising, I withdrew the dividends to reinvest at better rates. That has made it easier to be "stuck' earning "only" 3.01%

Thanks, jazz4cash!! I just found and checked my original paperwork and indeed it says it should be only 6 months of interest!

I am fairly sure when I called and asked AFCU, they told me it was 12 months. I will have to call again on Monday and ask again (and let them know I have original paperwork indicating 6 months if they tell me otherwise).

In my opinion, if the penalty is indeed only 6 months, then I think it makes sense to cancel all 3 CDs if I can lock in 5% or more. At 6 months penalty, I am only losing 1.5% interest in order to lock in 5% the 1st year and 5% thereafter. I may build a ladder rather than doing all at 5 years to cover the scenario if interest rates rise.